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Increased Our Fair Value for Berkshire Hathaway

Alleghany purchase looks like another value-enhancing deal.

With the 25-day go-shop period attached to Berkshire Hathaway's BRK.A BRK.B acquisition of Alleghany expiring, and no competing proposals to purchase the company arising, we have increased our fair value estimate for the wide-moat firm to $550,000 ($367) per Class A (B) share from $525,000 ($350). Our new fair value estimate is equivalent to 1.41 and 1.24 times our estimates for Berkshire's book value per share at the end of 2022 and 2023, respectively. For some perspective, during the past five (10) years, the shares have traded at an average of 1.42 (1.41) times trailing calendar year-end book value per share.

During the go-shop period, Alleghany and its financial advisor solicited alternative acquisition proposals from 31 potentially interested third parties but did not receive any alternative acquisition proposals. Berkshire is paying $848.02 per share in cash for Alleghany, which works out to a multiple of 1.26 times Alleghany's book value per share at the end of 2021. We view this as a reasonable price for what Berkshire is getting though the acquisition.

During the past five (10) years, Alleghany's shares have traded at an average of 1.12 (1.07) times trailing calendar year-end book value per share, implying that Berkshire is paying around a 15% premium over historical trading prices. The purchase price also represented a 29% premium to Alleghany's average stock price over the 30 days prior to the offer being announced, as well as a 16% premium to the firm's 52-week high closing price at the time. As such, it does not surprise us that no one stepped up to match Berkshire's all-cash offer of $11.6 billion for Alleghany.

Alleghany is a good fit for Berkshire, contributing a platform comprised of reinsurance and insurance (which accounted for 68% of the company's revenue last year), Alleghany Capital (which contributed 31%), and corporate-initiated activities. We feel Berkshire is better positioned than most other perceived buyers to get the most value out of Alleghany.

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About the Author

Greggory Warren

Strategist
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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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